Subscription box businessSubscription box businesses have been exploding in the last few years. From razors to meals, toothbrushes to evening gowns, there’s practically no consumer product that you can’t obtain via a subscription these days.

According to Zuora’s most recent Subscription Economy Index, subscription businesses, on average, are growing revenues 5X faster than S&P 500 revenues (18.2% vs. 3.6%) and U.S. retail sales (18.2% versus 3.7%).

What entrepreneur wouldn’t want to get in on a trend like that?

Many factors are driving this transformation. Both entrepreneurs and venture capitalists have recognized that recurring revenue businesses are more durable and valuable than businesses that take “one and done” orders. Consumers love the convenience of automatic shipments, predictable costs, and never running out of important products. And with the COVID pandemic driving even more consumers to replace in-store shopping with online ordering, this trend has only accelerated.

According to Zuora’s most recent Subscription Economy Index, subscription businesses, on average, are growing revenues 5X faster than S&P 500 revenues (18.2% vs. 3.6%) and U.S. retail sales (18.2% versus 3.7%).

For all these reasons, many digital entrepreneurs are diving into the subscription box marketplace. But there are both benefits and challenges to this business model, so before jumping in, it’s best to connect with an experienced team who can help you maximize your profitability and avoid the pitfalls.

What is a Subscription Box Business – and How Is It Different from Just “Ecommerce”?

Subscription box businesses send their subscribers boxes that contain items like beauty products, pet products, shaving razors, and food items. These boxes are sent out to customers on a regular basis such as weekly, monthly, or quarterly. Customers are typically billed automatically to their credit card when their product ships.

So where most ecommerce sites these days offer some form of auto-ship option, a true Subscription Box business is one where:

  • The product is either disposable (e.g. razors) or needs to be updated regularly (e.g. clothes)
  • The relationship with the customer is defined as an ongoing one
  • There is generally no option (or no easy option) to buy a single item – the subscription is everything

Why Are Subscription Boxes a Good Business To Be In?

The Subscription Box e-commerce business model really came to the forefront of the entrepreneurial imagination with the massive successes of companies like Dollar Shave Club, which was founded in 2012 and had received $163.5M from investors before it was acquired by Unilever in 2016 for a reported $1 billion. And there’s a lot of money to be made in the subscription box business with meal kits, too – for example the German company Hello Fresh reported annual revenues of 1.8 billion Euros in 2019.

The subscription box business model is different from conventional retail because it allows for more recurring revenue. Customers only have to make the purchasing decision once, and from there revenue keeps flowing into the business. Since it’s usually easier to convince a customer to make a purchase once than it is to convince them to make purchases often, subscription boxes have more predictable revenue flows. This recurring revenue makes it possible for businesses to invest more significantly in customer acquisition which fuels revenue growth and profitability,

Subscription boxes have been received positively by consumers because they offer convenient and personalized services, which are in high demand today.

Why are Subscription Box Businesses Considered High-Risk by Banks?

While subscription box businesses have a positive future outlook and recurring revenues, they are generally considered high-risk merchants by banks. This is because they are more likely to receive chargebacks. Here are just a few of the reasons.

Customers can forget about their subscription and the accompanying recurring payments, and when the charge shows up on their credit card bill, they could ask for a refund or file a chargeback with their card company. In other instances, customers forget to cancel their subscriptions and they file chargebacks to get their money back.

Fraud is a common problem in the subscription box space because these transactions are Card Not Present (CNP), making it difficult for merchants to verify cardholder information. It is common for subscription boxes to be purchased fraudulently using stolen credit card details which leads to chargebacks when the real card owner finds out about the fraud.

Particularly in today’s economic and logistical climate, there are greater risks in supply chain and fulfillment. For example it’s more likely with a subscription box program that a merchant could have a supply chain issue where they couldn’t fulfill orders as a result of being completely dependent on third parties for manufacturing, packaging, or order fulfillment. A key supplier could be back-ordered, or there could be issues with customs or tariffs for example. This lack of control could cause delays in delivery which could lead to chargebacks.

Subscription box customers also often cancel subscriptions and file for chargebacks if they feel the contents of the box did not meet their expectations.

High chargeback rates because of the factors mentioned above can make it difficult for subscription box businesses to set up merchant accounts.

What can merchants do to mitigate these chargeback risks?

  • Partner with a payment processor like NMA that has deep experience in the ecommerce and subscription box economy. A great processor can help in many ways – by underwriting the business thoughtfully to head off some potential chargeback issues in advance, and by providing an open channel of communication during any issues. NMA also offers Fraud Wrangler and other tools that help alert you to potential chargebacks, and even allow you to automatically refund a charge before it becomes a chargeback.
  • Ensure you have great quality partners in other parts of your business ecosystem. For example, if your business relies on third parties for fulfillment, customer service, or manufacturing, vet these providers carefully. Check references and talk to their other customers. This is vital because breakdowns in any of those aspects of your business can lead to chargeback trouble.
  • Take great care of your customers – including maintaining excellent communication. Many chargebacks start as refund requests that are poorly handled. And unfortunately some customers prefer to call their bank to dispute a charge as it’s sometimes the “path of least resistance” vs. a potentially uncomfortable call with your company’s customer support personnel. So you need to make sure you build a relationship with your customers so they’ll feel comfortable addressing any concerns directly. Refunding a customer’s money is always better than having the situation turn into a chargeback.

Why The Bank Is Not The Right Place To Go If You’re Trying To Set Up A Subscription Box Business Merchant Account

Since subscription boxes are considered high-risk businesses, conventional banks are not the right place to go if you’re trying to set up a merchant account for several reasons:

  • They might not approve your business for a merchant account because most banks and payment processors avoid working with businesses that are categorized as high-risk. In fact, most automatically reject high-risk merchant accounts.
  • If they do approve your business, you might have to jump through many hoops and get stuck with very high fees. Moreover, your merchant account will have many restrictions and it will be highly regulated, making the experience more difficult and expensive. It’s highly likely that you will also have to deal with poor services because most banks don’t understand the subscription box business ecosystem and thus cannot tailor their services to your needs.
  • There is also a high risk of your merchant account being terminated just as your business begins to scale. As your business grows and you start getting more customers, the numbers of transactions will increase and so will your risk of chargebacks and the number of actual chargebacks that you get. At this point, many banks and processors will terminate your account. This will massively disrupt your business, inconvenience your customers, and reduce your revenue.

How NMA Can Help You Get Managed-Risk Merchant Services for Subscription Boxes

While many banks and payment processors do not provide high-risk merchant services for subscription boxes, there is still hope! Your business can still accept credit cards and offer recurring billing with the help of a managed-risk merchant services provider like National Merchants Association (NMA).

We have a deep understanding of different e-commerce verticals as well as those that are most prone to chargebacks. Whereas banks tend to turn down businesses that experience chargebacks, NMA is committed to helping businesses start taking payments as fast as possible, as long as they are willing to keep their chargebacks under control. This expertise ensures that we offer high-quality and highly tailored services to all our merchants – because at NMA, We Work For You®.

We know the best practices for avoiding chargebacks and we provide this information to our subscription box clients to improve their client service and prevent chargebacks. Additionally, NMA has partnered with Fraud Wrangler® which helps subscription box merchants with predicting, controlling, and preventing chargebacks. Fraud Wrangler has an easy-to-use dashboard that helps merchants monitor the state of their merchant account and their chargeback standing, making it easy for them to control chargebacks. This tool keeps merchants informed with email and mobile notifications, and it integrates with payment gateways thus speeding up chargeback prevention. Fraud Wrangler helps merchants maintain healthy Merchant IDs (MIDs) and prevent account terminations.

At NMA we understand all the key components of the subscription box ecosystem, including manufacturers, fulfillment houses, and customer service centers, and we know which ones are high-quality and which are prone to chargeback problems. This understanding helps us underwrite subscription box clients thoughtfully, leading to a longer lifespan for those businesses.

With our expertise and thorough knowledge of the subscription box ecosystem, we help merchants scale and succeed in their businesses. We take care of your payments so that you can focus on building your subscription box business.

The Takeaway

The popularity and profitability of subscription box businesses will only continue to grow as more consumers embrace e-commerce. Don’t let the tag “high-risk merchant” stop you from scaling your subscription box business. Contact us today and learn how NMA can help you set up a managed-risk merchant account for your subscription box business.

 

Photo by Ketut Subiyanto from Pexels.